Topic 4 Everyday banking

Transcription

1 Topic 4 Everyday banking Learning otcomes After stdying this topic, stdents will be able to: identify the key featres of different types of crrent accont; and begin to evalate lifelong financial planning, by nderstanding that people s everyday banking needs change as they pass throgh the varios life stages. Introdction As we saw in Topic 3, crrent acconts enable people to se a range of payment methods. For example, people se crrent acconts to make and receive payments by electronic transfer, standing order and cheqe. Payments ot of an accont are recorded on bank statements as debits, while payments into an accont are called credits. These inclde direct credits, which are sed by organisations to make electronic payments of salaries, pensions, state benefits and tax credits into crrent acconts. People also se crrent acconts to store money, and some providers offer interest on balances. People can borrow from their crrent accont, too, sing an overdraft facility, which we discss in more detail in Topic 6. Crrent acconts have different featres, sch as text alerts to warn the accont holder when their balance falls to a certain level. 4.1 Choosing a crrent accont Most adlts se a crrent accont for their everyday banking needs, sch as receiving payments, storing money for short periods of time, making payments and accessing cash. There are crrent acconts designed for people aged 11 and over and others that are only available once people are 18 becase they inclde overdrafts. Yong people often se a savings accont for everyday banking becase their main reqirements are to store money and withdraw cash. ifs University College

2 Choosing a sitable crrent accont 1 Cheryl is 15 years old and needs an accont to store the money she earns from babysitting, her allowance from her parents and occasional financial gifts from relatives. She wants to be able to withdraw cash easily, pay for goods in shops and for her money to earn interest ntil she needs it. Cheryl decides on a crrent accont designed for yong people aged that pays interest of 0.55% AER on credit balances. It offers her a debit card to withdraw cash in branch and at ATMs and to pay for goods in shops (provided she has sfficient fnds in her accont). It also offers online and mobile banking with text alerts if her accont balance is low. Cheryl s brother Jason is 14. He prefers to pay for everything in cash and to earn a higher rate of interest on his money so he ses a savings accont for everyday banking. Jason s savings accont is designed for people from birth p to the age of 15. It pays an interest rate of 3% AER, offers a cash card for savers aged 7 and over and nlimited withdrawals. When people choose a crrent accont they look for an accont that matches their everyday banking needs for example, to be able to make atomated payments sch as direct debits and to bank online. Some crrent acconts are free to se as long as the accont is in credit; for others, people have to pay a fee becase extra services are available with the accont. Crrent acconts are available from banks, bilding societies and the Post Office. They are also available from retailers sch as Marks and Spencer, which offers packaged acconts operated by M&S Bank, a wholly owned sbsidiary of HSBC. This means that M&S bank branches are open whenever the stores are open, inclding on bank holidays. Tesco has also annonced plans to offer crrent acconts (ITV News, 2013). All crrent acconts offer reglar statements online or on paper to enable people to monitor their transactions. Other facilities vary from accont to accont. 54 ifs University College 2014

3 4.2 Different types of crrent accont There are a nmber of different types of crrent accont inclding: standard crrent acconts, offering a fll range of payment methods inclding debit card and cheqe book; packaged acconts, which charge a fee for offering additional services sch as travel insrance; basic bank acconts, which offer a cash card only and no overdraft or cheqe book; stdent acconts; yoth acconts (for people nder 18 years old); and premim acconts (for wealthy cstomers). Figre 4.1 Types of crrent accont, % 1% 1% 9% 3% Standard 67% Packaged 17% Basic 9% 17% 67% Stdent 3% Yoth 2% Premim 1% Other 1% Sorce: Office of Fair Trading (2013). Contains pblic sector information licensed nder the Open Government Licence v1.0. ifs University College

4 4.2.1 Basic bank acconts A basic crrent accont sits people who wish to avoid borrowing, sch as those living on benefits or low incomes or people who have not held a crrent accont before. Cstomers who have a basic crrent accont cannot get into debt becase this type of accont does not offer a debit card, an overdraft or a cheqe book. Most basic crrent acconts can be operated free of charge; however, people with a history of frad or who are bankrpt may need to pay a set-p charge and / or a monthly service charge. People operate basic crrent acconts sing cash cards or pre-paid cards. Pre-paid cards can be loaded with fnds from the accont and then sed to make prchases anywhere that the card brand is accepted. Most basic crrent acconts offer direct debits and standing orders to pay bills. Providers will not make these payments, however, if the accont does not have sfficient fnds to pay the transaction. The Post Office Card Accont is an example of a basic bank accont. This type of accont wold sit Alice Martin, who is crrently nemployed. Basic bank acconts were introdced in 2004 as part of the government s plans for financial inclsion that is, ensring that people have access to banking services. The government agreed a shared goal with the main high street banks to halve the nmber of people withot bank acconts by Research qoted in the HM Treasry report, Realising banking inclsion: The achievements and challenges (Ellison et al, 2010) identified that people withot a bank accont are disadvantaged in a nmber of ways. One of the key problems is that they cannot pay by direct debit. As a reslt, they are nable to take advantage of any services that reqire reglar electronic payments, sch as mobile phone contracts or internet access. They pay higher energy costs becase they se pre-paid meters rather than direct debits: energy companies often offer disconts to people who pay by direct debit. They cannot make payments over the telephone or online. In 2004 approximately 2.7 million people in the UK did not have a bank accont. By million of these people had opened a bank accont, with 7 in 10 of them opening a Post Office Card Accont. According to the Office of Fair Trading s 2013 report into crrent acconts, in % of active acconts in the UK were basic bank acconts. An active accont is one that has had a transaction within three months Yoth acconts Yoth crrent acconts are available for people aged nder 18 years old. These crrent acconts do not offer overdraft facilities becase people need to be aged 18 or over to enter into a contract to borrow money. Yoth crrent acconts offer a range of services, depending on the accont and the age range of the intended accont holders. For example, cash cards, debits cards, standing orders and direct debits, a cheqebook, online banking, mobile banking and text alerts are often available on acconts for people in the age grop, while acconts for those aged often offer cash cards or debit cards. 56 ifs University College 2014

5 The Office of Fair Trading (OFT) 2013 report on crrent acconts identified that jst 2% are yoth acconts. This is probably becase many yong people se savings acconts to manage their money instead of crrent acconts. People often get their first crrent accont when they start work and their employer wants to pay them electronically Standard crrent acconts Standard crrent acconts offer the fll range of crrent accont facilities, sch as receiving payments, a cash card or debit card, direct debits, standing orders, overdraft, cheqe book, online banking, mobile banking and text alerts. Standard crrent acconts are sally free of charge nless the accont holder ses the overdraft facility or reqests services that incr a charge, sch as another copy of their statement. Standard crrent acconts sit most people who wish to pay bills by direct debit, manage their money sing a variety of commnication channels and borrow money for short periods of time. Text alerts can be particlarly sefl to tell accont holders when their balance is low so they can avoid going overdrawn. According to the Office of Fair Trading s 2013 report, 67% of the crrent acconts sed in the UK are standard acconts Stdent and gradate acconts These acconts are variations on the standard crrent accont tailored to the needs of stdents in higher edcation and recent gradates. The key featres are a lowinterest or no-interest overdraft facility and incentives sch as disconts on contents or travel insrance policies. Providers wish to attract stdents to their crrent acconts as some will be high earners in the ftre. Stdent acconts make p 3% of the crrent acconts sed in the UK, according to the Office of Fair Trading s 2013 report. This is probably becase stdent crrent acconts are only available to people who are stdying. Once their corse ends, gradates will switch to other types of crrent accont. Once stdents gradate, they need to switch to a gradate or standard crrent accont. ifs University College

6 4.2.5 Interest paid when in credit Some crrent acconts pay interest on credit balances. In May 2013, examples inclded the Reward Crrent Accont from Halifax which paid 5 per month, the Santander 123 Crrent Accont that paid interest of 3% AER, and the FlexDirect accont from Nationwide Bilding Society, which paid 5% AER (moneyspermarket.com, 2013). There are sally conditions attached to these crrent acconts, sch as paying in a minimm monthly amont, keeping the accont in credit, or banking online or by telephone. Interest is paid on balances between certain minimm and maximm amonts. There may also be fees for holding the accont. People who sally have a bdget srpls may find these acconts sit their needs. Cation is reqired, however, as going overdrawn on these acconts can incr charges that are greater than the interest or reward paid. Frther, some acconts reqire a minimm balance to be maintained, sch as 1,000, and people may find that their srpls can earn higher AERs in savings acconts that have fewer withdrawal restrictions Joint acconts Joint crrent acconts are held by two or more people. Most types of crrent accont can be held in joint names. Joint acconts sit people who share finances, sch as married coples and those in civil partnerships, and people sharing a rented home. John and Pat Martin, for example, might wish to consider opening a joint accont to pay for hosehold bills. A joint accont is probably not sitable for people who have different priorities or attitdes to managing money. If they wish to pool some incomings in a joint accont to pay for joint otgoings, accont holders may wish to draw p clear rles for how the accont will be operated and who will be responsible for managing it. The provider will need to know who can withdraw fnds from a joint crrent accont, and if a signatre is reqired from more than one of the accont holders to make a withdrawal. If joint acconts become overdrawn then all accont holders are responsible for repaying the fll amont. In some circmstances providers can take money from one person s accont to repay the overdraft on a joint accont that bears their name Packaged acconts Packaged crrent acconts offer accont holders extra benefits for a monthly fee. Benefits may inclde mobile phone and travel insrance, car breakdown cover, disconts in stores and sbscriptions for media services. The accont fee can vary from 2 to 20 or more per month, and the benefits vary from accont to accont. According to the Office of Fair Trading s 2013 report, 17% of UK crrent acconts are packaged acconts. People may find packaged acconts sitable if the costs of the benefits they will se are greater than the annal accont fee. For example, Tabita is considering a packaged accont that provides mobile phone cover, travel insrance and car 58 ifs University College 2014

7 breakdown cover; it has a monthly fee of 20, meaning that she wold pay 240 per year. Her hose contents insrance incldes mobile phone cover, so she does not need that benefit. She rarely travels so does not need the travel insrance that is inclded. This means that the only benefit she wold se wold be the car breakdown cover and she can by that for far less than 240 per year. Tabita decides against the packaged crrent accont. Her friend Philippe has different personal financial circmstances. He has family in France and reglarly takes his wife and children to visit them. He wold se the Eropean car breakdown cover and family travel insrance offered by the packaged accont. The accont fee is cheaper than if he boght these two insrances separately so the packaged accont represents good vale for money for him Premier acconts Premier acconts are designed for wealthy cstomers and offer a range of additional services, sch as a personal banker to help accont holders manage their finances and banking prodcts. Accont holders have to have a certain level of income and / or fnds to save or invest to be eligible for premier acconts for example, earnings of 75,000 or more. According to the OFT report, only 1% of UK crrent acconts are premier acconts. Choosing a sitable crrent accont 2 Fred lost his job last year and has been nemployed ever since. He closed his standard bank accont and opened a basic accont instead to help him manage his low income. The advantage of the basic accont is that he cannot get into debt becase his provider will not pay transactions nless he has enogh money in his accont. Fred chose an accont with the Post Office as he is prepared to move anywhere in the contry to get a new job and there are Post Office branches in or near most locations. Fred s sister Tina has been married to Brian for two years. They each have a crrent accont in their own name and they have a joint accont for their rent. Tina chose a standard crrent accont with her bilding society. Her employer pays her salary into this accont by direct credit and Tina then pays 300 per month into the joint accont by standing order. She also pays for some of the hosehold expenses from her crrent accont. For example, she has set p direct debits to pay for the gas and electricity bills. Tina does most of her banking online. Brian chose a packaged crrent accont from a bank for his sole accont. He also receives his salary by direct credit and pays 300 per month into the joint accont by standing order. He also pays bills by direct debit. The reason why Brian chose a packaged accont was that the disconts on car breakdown cover and home insrance were larger than the accont s annal fee. Brian also finds the mobile banking service sefl for checking his accont. ifs University College

8 4.3 Opening an accont Before anyone can open any new accont, inclding a crrent accont, they mst spply the provider with proof of their identity and address. This reqirement is designed to prevent money landering and is set ot in the Money Landering Reglations Money landering is the term sed to describe the ways in which criminals can se acconts to hide the sorce of their fnds (for example, drgdealing) and to make payments in spport of their activities (for example, terrorist activities). Providers who do not follow the legal reqirements face heavy fines. For example the Financial Condct Athority (FCA) has fined a private bank 4.2 million for failing to take reasonable care to establish and maintain effective anti-moneylandering controls over a period of more than three years (FCA, 2013). Providers need separate proof of identity and address so one docment cannot be sed to prove both. When people show providers their docments in branch, the docments mst be originals rather than copies or print-ots from internet sites. Photographic identification docments sch as passports and UK drivers licences mst be crrent the provider will not accept them if they have expired. If people apply for an accont online, they will be asked to send docments by post or show them to the local branch. Posted docments can sometimes be photocopies, especially if they are signed by a professional sch as a lawyer, accontant or doctor to confirm that they are tre copies of the originals, and that the person signing has seen the originals. Applicants need to check with their provider which docments are accepted as it can vary from provider to provider and accont to accont. According to the British Bankers Association (BBA) the following are often accepted by providers as proof of identity or a UK address: gas, electricity, water or phone bill that is less than three months old; concil tax bill issed within the crrent financial year; driving licence issed in the UK (photo card and fll paper conterpart with crrent address); crrent passport; employer s ID card if the employer is known to the provider; pension or other social secrity book; medical card; HMRC docmentation; insrance certificate issed in the last 12 months; or mail order statement that is less than three months old (BBA, 2009). 60 ifs University College 2014

9 People who are on benefits, who are yong or who do not pay bills can find it difficlt to prove their identity and address becase often they do not have the types of docment reqired. In these cases, providers will accept other docments: for example, people on benefits might se an entitlement letter issed by the Department of Work and Pensions (DWP), HM Revene and Cstoms (HMRC) or a local athority, or an identity confirmation letter issed by DWP or a local athority. Yong people may be able to se birth or adoption certificates as proof of identity; they wold also need a confirmation letter from their school / college / niversity / care instittion or their employer, stating their name, address and details of their edcational or employment stats. This letter needs to have been issed in the last 12 months. Stdents may be able to se their UCAS letter. For some acconts designed for very yong children, the parents or gardians identification and address details are taken instead. Providers can refse an application to open an accont. This may happen if the provider thinks that the applicant wold not be a profitable cstomer. Providers can also sggest that people open a different type of accont. For example, George applied to open a standard crrent accont. The provider checked George s history and discovered that he had had problems repaying money he owed. The provider sggested that George open a basic crrent accont bt said that it wold review his accont in six months time. 4.4 Monitoring transactions It is important that people check their crrent acconts to ensre they have sfficient money to pay transactions that are de, that they are keeping to their bdget and that mistakes have not been made. People can se statements that are provided online, on paper and via ATMs to monitor their transactions. Statements are sally provided once a month for crrent acconts, nless very few transactions are made, in which case they may be provided less freqently. Statements often se abbreviations to describe transactions. According to the British Bankers Association there are no standards for statement abbreviations and each provider can devise their own (BBA, no date). For example, money paid in by electronic transfer may be referred to as a DC (direct credit), Bacs transfer (Bacs is the central payment system sed to process several different types of electronic payment, especially direct credits) or BGC (bank giro credit). Direct debits may appear as DDR, DD or BD. Providers sally explain the codes on the statement and / or on their website or crrent accont literatre. Cheqes will sally appear as the nmber of the cheqe. It is therefore very important that people write the details of the payee on their cheqe books so they know where the money has been paid. ifs University College

10 Checking a crrent accont statement Here is one of Tina s statements. Date Details Payments Receipts Balance debits credits 03 Feb Balance from previos statement Feb DCR Kite and Raglan plc 1, , Feb SO Joint accont , Feb Cheqe , Feb Cash wdl ATM, Old Town , Feb DCD Spermarket, Old Town , Feb DCD Always Petrol, Old Town Feb Cheqe Feb Cheqe Feb Cash wdl ATM, Old Town Feb DCD Spermarket, Old Town Feb DD Gas Company Feb DD Electric Company Feb DD Local charity Feb Cash Wdl ATM, Old Town Feb DD Mobile phone Feb OP Credit Card Feb DD Water Company Feb Cash Wdl ATM, Old Town Feb DD Landline and broadband Feb DCD Spermarket, Old Town Feb XF to Savings DCD = Debit card, DCR = Direct credit, DD = Direct debit, SO = Standing order, OP = Online payment, Wdl = Withdrawal, XF = Transfer 62 ifs University College 2014

11 When Tina receives her statement she checks each entry to make sre it is what she expects. From her cheqe book she can tell that cheqe: was sent to her brother Fred to help him pay for groceries; was her share of the bill in a café when she went ot with friends; and was paid to a plmber who repaired a leak from her hot water pipe and serviced the boiler. From her ATM receipts, Tina can check that each cash withdrawal is correct. She has not paid any fees for withdrawing cash sing her debit card becase she always ses ATM machines that belong to the LINK network. These machines are free for cstomers of her bilding society. She withdrew more cash than sal on Valentine s Day becase she wanted to by a present for Brian. Tina has set p a mobile alert that tells her when her balance goes below This alert was triggered on 28 Febrary when she paid at the spermarket in Old Town. Her balance at the end of Febrary is jst in credit at Her employer Kite and Raglan plc pay her on the first Tesday of the month so she is expecting her next salary to be credited to her accont on 4 March. Tina has set p her standing orders and direct debits to be paid after she has received her salary. She aims to transfer some money to savings every month bt does this manally online as the amont varies from month to month. 4.5 Switching and closing acconts Providers offer a free service for switching between acconts at different providers. This is discssed in more detail in Topic 7. They also offer a free switching process between acconts held at one provider for example, stdents may switch from stdent crrent acconts to gradate acconts at the end of their corse and from gradate acconts to standard crrent acconts after abot three years. People who want to close their crrent accont can do so at any time and at no cost, althogh they mst pay any fees and other money that they owe. They do not need to give a reason, althogh many providers will ask, for marketing research prposes. People need to retrn their payment cards and cheqe books when they close their accont. The provider may need to delay closing the accont if there are atomated payments de or cheqes written on the accont that have not been presented for payment. People will need to tell the provider where to pay the balance on the accont for instance, by a cheqe made payable to the accont holder or a transfer to another accont. ifs University College

12 Sometimes a provider will close a crrent accont, for example if the cstomer no longer meets minimm deposit criteria. In these cases the provider mst give at least two months notice. Key ideas in this topic The different crrent acconts available and the different cstomer reqirements they are designed to meet. How to open an accont. How to se statements to monitor transactions on an accont. How to close an accont. References BBA (2009) Proving yor identity: how money landering prevention affects opening an accont [online], 9 Agst Available at: [Accessed: 20 May 2013]. BBA (no date) Understanding bank statements [online]. Available at: [Accessed: 20 May 2013]. Ellison, A., Whyley, C. and Forster, R. (2010) Realising banking inclsion: the achievements and the challenges pdf]. HM Treasry. Available at: [Accessed: 3 Jne 2013]. FCA (2013) FCA fines EFG private bank 4.2m for failres in its anti-money landering controls [online]. Available at: [Accessed: 20 May 2013]. ITV News (2013) Crrent acconts key part of Tesco Bank strategy [online], 11 April Available at: [Accessed: 20 May 2013]. Moneyspermarket.com (2013) High interest bank acconts [online]. Available at: [Accessed: 17 May 2013] 64 ifs University College 2014